'Absurd' Chinese Trade Data Confound Analysts

Defying expectations, China posted its first trade deficit in March since February 2012 on surging imports, completely out of whack with market forecasts.

Added to that, the world's second largest economy saw export growth of 10 percent year on year while exports to the U.S. and Europe, its two biggest markets, continued to slump, which is making analysts question the reliability of its trade data.

Alistair Thornton, senior China economist at financial analysis firm IHS, said the March trade numbers have not instilled anymore confidence in either the quality of China's data or the strength of its economic recovery.

"While total export growth of 10 percent year on year in March is far more reasonable a number than in January and February, the breakdown of exports by destination veers towards the absurd," Thornton said, pointing to the fact that China's exports to Hong Kong, which are re-exported to the European Union and the U.S., grew by an astounding 93 percent year on year in March, but exports to the EU contracted by 14 percent and to the U.S. by 7 percent.

"With pretty weak growth in the EU and the U.S., which are two main global demand centers, we were surprised that China is reporting very healthy trade numbers – there was 20 percent [export growth] in the last month and now 10 percent this month," Thornton said.

China recorded a trade deficit of $884 million in March due to a growth of 14.1 percent in imports, far above expectations of a 5.2 percent rise, while the 10 percent export growth fell just short of the 10.5 percent rise forecast in the benchmark Reuters poll. The markets were also expecting China to post a trade surplus of $15.4 billion.

Liu Li-Gang, chief China economist at ANZ said China's data inconsistency has not gone away and is "encouraged by over invoicing by Chinese exporters to bring in capital inflow so as to arbitrage the renminbi's [yuan] steady appreciation and get more export rebate tax from the central government."

The right policies are needed to phase out export subsidies, which are skewing China's trade data, according to Li-Gang.

Alistair Chan, economist, Moody's Analytics, meanwhile, said that while the trade data may be overinflating exports, we need to see April's data when the Chinese Lunar New Year effect will be truly gone to be sure.

"I would note that in 2012 Chinese exports to Hong Kong rose by $65 billion from February to March, the biggest month-on-month jump all year," Chan said. "There is a lot of volatility in the February-March data usually, so it pays to wait."

Thornton, however, points out that China exports to the U.S., Europe and Hong Kong generally move in unison, because the global economy is so interlinked.

"We've seen a surge of activity, flooding towards Hong Kong and less of those going to EU and U.S., so either Hong Kong has gone on to the most unbelievable consumption spree of all time or there's something wrong here," Thornton said.

No Boost From Exports

Exports, which account for about 30 percent of China's gross domestic product (GDP), have being facing significant headwinds from debt constrained consumers and governments in the West.

To get a more accurate picture of how China's exports are progressing, we need to strip out the Hong Kong number, according to Thornton, who thinks export growth is actually relatively weak.

"If you stripped out the Hong Kong number from China's exports then you have total export growth number of around zero, if not below zero. What that says is China's exports situation is pretty weak and that's going to provide almost zero contribution to growth," Thornton said.

Chan of Moody's backed that sentiment saying that he doesn't expect China to draw much strength from exports this year.

"Overall I think China's surplus is going to be a lot smaller in 2013 than it was last year," Chan said. "I don't think there's going to be much of a boost from external demand."